NEW YORK (AP) -- President Bush's budget proposal includes new savings accounts that could revolutionize the way Americans save to buy homes, finance college educations for their children and fund retirement.
It's too early to predict if the new accounts will pass Congress in their current form, especially with some lawmakers contending they're biased toward the rich. And it's hard to know if the nation's money-starved states will go along with the tax breaks in the federal plan.
Still, the new accounts -- the Lifetime Savings Account, the Retirement Savings Account and the Employer Retirement Savings Account -- are worth taking a look at since they hold the promise that saving could become easier and, at the same time, provide substantial tax benefits for those who sign on.
''The proposal offers a lot of new opportunities for savers,'' said John D. Mroz, manager of retirement and college planning services at Strong Financial Corp. in Menomonee Falls, Wis. ''That might pull in people who were on the sidelines before. It also will be a great incentive for people already investing for retirement.''
With the proposed Lifetime Savings Account, or LSA, an individual would be allowed to contribute up to $7,500 a year starting in 2003. There would be no tax deduction for contributions, but earnings would grow tax free. Best of all, money could be removed from the account at any time for any purpose without penalty.
As envisioned, the LSAs would have no income or age requirements, so a worker could set one up for a nonworking spouse, or grandparents could fund one for a grandchild.
''That makes opening an LSA a natural first step,'' Mroz said.
He noted that a family that can manage savings of $4,000 to $5,000 a year now must make decisions about how much to put into an Individual Retirement Account or Roth IRA, how much into a college saving fund and how much for an emergency fund.
''With the LSA, they can achieve all those goals with one account,'' he said.
The Retirement Savings Account, or RSA, also would allow a maximum contribution of $7,500 a year, and withdrawals after age 58 would be tax free. Contributors would be required to have earned income.
The Bush proposal would allow workers who currently have Individual Retirement Accounts to convert them to RSAs, but taxes would have to be paid over a four-year period. Those who don't convert would not be allowed to make further contributions to their IRAs.
Ed Slott, an IRA specialist in Rockville Centre, N.Y., who wrote ''The Retirement Savings Time Bomb,'' said he would encourage most IRA holders to convert to the new RSAs ''because you can't beat a zero percent tax rate.''
He added that a high income couple could shelter considerable money using the new accounts -- $15,000 in LSAs and $15,000 in RSAs. They also could use the new LSAs ''to pass on tax-free money to their kids and grandkids.''
His fear is that the plan could result in such long-term tax losses to the U.S. Treasury that ''you'd have to worry that in 10 to 20 years, when you come to collect your tax-free money, they (government officials) might not keep their promise ... or might impose other taxes to make up for the lost revenue.''
The Employer Retirement Savings Account, or ERSA, is designed to replace the existing 401(k), 403(b) and 457 retirement accounts, which take their names from sections of the Tax Code. Rules governing the plans are to be simplified, and contributions would continue to be in pretax dollars, with taxes due when the money is withdrawn. This year's contribution limit would remain at $12,000.
Trisha Brambley, president of the benefits consulting firm Resources for Retirement Inc. in Newtown, Pa., said the advantage of ERSAs is that ''anything that simplifies matters is good news.''
On the other hand, she noted, ''there is concern that some small employers won't bother offering a (company) plan because there are alternatives for the individual'' in the LSAs and RSAs.
''The problem is that many people need some incentive to save, like an upfront tax break,'' she said. ''The promise of tax savings in the long-term may not do it.''
Will the new accounts come into being?
Richard O'Donnell, an editor for RIA, a New York-based provider of information and software to tax professionals, said he expected them to run into similar opposition in Congress as have the Bush administration proposals on ending taxes on dividends.
''I'm sure we'll hear, ''They're for the wealthy,''' he said. ''Aside from that, there's the potential long-term cost. Congress is going to ask if the country afford this at a time it has ballooning deficits.''
On the Net:
Bush proposal: www.ustreas.gov/press/releases/kd3816.htm
Slott site: www.irahelp.com
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